Prologue

2. Prologue • 1990’s • Falling defense budget • MD: struggling • Boeing: expanding • 1996 • Negotiations • 1997 • Merger

3. Outline • Introduction • External Assessment • Internal Assessment • Strategic Choice • Recommendations and Implications

4. Introduction • Focus of Analysis • Business Cases • Brief History • Mission &Vision

5. Focus of Analysis • Problem Statement: • How does the merger between McDonnell Douglas and Boeing affect their corporate cultures and competitive position in a slowly growing, mature industry? • Purpose of Analysis • To fully examine Boeing‘s position in the Defense segment of the Aerospace industry • Suggest a strategic solution to the problem • Timeframe: 1996-1999

6. The Boeing Co. • Largest aerospace company • Industry: Aerospace & Defense • Revenues (1999): $58 billion • Employment: over 230,000 • Location: HQ in Seattle, offices in 60 countries • Markets: • Commercial Aircraft • Military Aircraft and Missile Systems • Space and Communication

7. Commercial Segment • 1999 Revenues : $38.5 billion (66%) • Products: • Commercial Aircraft • Business Jets • Buyers: • World Airlines • Shipping Companies • Corporations • Competitors • Airbus Industries • Textron

8. Defense Segment • 1999 Revenues: $19.2 billion (22%) • Products • Tactical Fighters • Helicopters • Heavy Bombers • Strike Missiles • Buyers • Governments around the world • Competitors: • Lockheed Martin, Raytheon, Northrop Grumman, General Dynamics, BAE, EADS

9. Defense Segment • Discussion of Defense Segment • Core of the problem • MD is primarily a defense company • The merger had the greatest impact on Boeing’s position in the defense segment

10. 1997 1996 1992 1916 MD acquired Rockwell acquired P. Condit - President 1945 Founded B-29 bombs Hiroshima Timeline

11. Mission & Vision • Mission: Through the strength of our people, we will lead the world by honoring our commitments through quality products and processes in order to meet the needs of our customers and shareholders. • Vision: People working together as one global company for aerospace leadership.

12. Outline • Introduction • External Assessment • Internal Assessment • Strategic Choice • Recommendations and Implications

13. External Assessment • General Environment • Economic - Regulatory • Socio – Cultural - Global • Technological - Demographic • Competitive Environment • Economic Structure - Porter’s Five Forces • Life Cycle Stage - Industry Attractiveness • Competitor Analysis • Strategic Group Analysis - Key Success Factors • Competitor Analysis Model

14. General Environment Economic Opportunities • Expected increase in DOD spending • Rebounding government aerospace orders Threats • Relatively low government expenditures

15. General Environment Socio - Cultural Opportunities • Active lobbying for an increase in defense budget • Voters in favor of spending Threats • Growing political pressure to balance budget

16. General Environment Technological Opportunities • Demand for high-tech warfare equipment • Development of space warfare Threats • Quick product obsolescence • Technology-intensive production lines

17. General Environment Regulatory Opportunities • Support from U.S. Dept. of Defense • End of large-scale horizontal integration Threats • Licenses • Regulation favoring foreign acquisitions

18. General Environment Global Opportunities • Opening foreign markets • DOD encourages transatlantic mergers • Expanding NATO Threats • Consolidation of defense firms in the EU • Cyclical effect caused by Asian Crisis • Sharing information may pose threats

19. General Environment Demographic • Governments: Buyers and Consumers • Demographic information is relatively insignificant

20. General Environment Keep in mind! Opportunities • Expected increase in Dept. of Defense spending • End of large-scale horizontal integration • Dept. of Defense is encouraging transatlantic mergers • Demand for high-tech warfare equipment Threats • Slow growth in domestic markets. • Consolidation of defense firms in the EU • Licenses

21. General Environment Keep in mind! The defense segment of the U.S. Aerospace industry is facing a reluctant growth in the general background of tight government regulation. However, the opening markets around the world, coupled with an increase in the demand for high-tech warfare equipment, present the technologically savvy U.S. contractors with a genuine opportunity for overseas expansion.

22. Competitive Environment Economic Structure Tight oligopoly: - Few competitors - Control most of the market

23. Competitive Environment Life Cycle Stage

24. Competitive Environment Life Cycle Stage Maturity - Tight Oligopoly - Debt Financing - Active Consolidation - Op. excellence - Intense Rivalry

25. Competitive Environment Porter’s 5 Forces Model

26. Competitive Environment Porter’s 5 Forces Model Threat of New Entrants: - High economies of scale - High product differentiation - High capital requirements - High switching costs - High likelihood of retaliation LOW

27. Competitive Environment Porter’s 5 Forces Model Threat of Substitute Products: - Very few products with better price / performance tradeoff LOW

28. Competitive Environment Porter’s 5 Forces Model Bargaining Power of Raw Material Suppliers: - multiple suppliers of raw material - raw materials are a commodity - low switching costs - no threat of forward integration Part Suppliers: - few firms - differentiated products - low switching costs - important input - no substitutes LOW HIGH MODERATE

29. Competitive Environment Porter 5 Forces Model Bargaining Power of Buyers: - Buyers are concentrated (Monopsony) - Buyer has full information - Buyer has limited financial capacity HIGH

30. Competitive Environment Porter 5 Forces Model Rivalry: - Bidding wars for government contracts - Tight Oligopoly: few competitors - Maturity: Slow growth - High fixed costs - High exit barriers FIERCE

31. Competitive Environment Keep in mind! In the defense segment of the aerospace industry the buyer has the power

32. Competitive Environment Industry Attractiveness • For New Entrants: • High barriers to entry • Considerable initial outlays • Tight oligopoly • For Incumbents: • High barriers to entry • No threat of substitutes • Decline in defense market • For Boeing: • Incumbent in a highly protected industry • Financial resources LOW MODERATE HIGH

33. H Lockheed Martin Boeing Raytheon Market Share Northrop Grumman General Dynamics L Specialize in one area R&D and Production Some Product Diversification Competitor AnalysisStrategic Group Map

34. Competitor AnalysisKey Success Factors 1-4 (1 – Least ………….. 4 – Most)

35. Competitor Analysis Competitor Analysis Model Lockheed Martin • Goals: • Financial and operational stability • Strategy: • Related diversification • Global expansion • Assumptions: • Defense budget will start increasing • Capabilities: • Strong lobbying position • Expertise in the segment • Vast resources

36. Competitor Analysis Competitor Analysis Model Northrop Grumman • Goals: • Gain market share in IT, IS, and missile defense sectors • Strategy: • Key acquisitions • Differentiation • Assumptions: • Defense budget will start increasing • Capabilities: • Operational excellence

37. Competitor Analysis Competitor Analysis Model Raytheon • Goals: • Operational stability • Strategy: • Turnaround in operations • Overcome internal cultural differences • Assumptions: • Defense budget will start increasing • Capabilities: • Flexibility

38. Competitor Analysis Competitor Analysis Model

39. Competitor Analysis Boeing’s Response Boeing faces competition in every segment of its business. In order to maintain and advance its position in the defense segment, Boeing will need to increase efforts and spending in research and development. It will also need to maintain its operational excellence at the six-sigma level. To ensure an increased profit margin, Boeing will need to increase lobbying efforts to obtain lucrative government contracts.

40. Outline • Introduction • External Assessment • Internal Assessment • Strategic Choice • Recommendations and Implications

41. Internal Assessment • Leadership • Culture • Organizational Structure • Value Chain Analysis • Financial Ratio Analysis

42. Leadership/CultureBoeing • Inspirational Leader • People Focused Management Style • Rituals • Team Oriented • Great Social Skills Phillip Condit

43. Leadership/CultureMcDonnell Douglas • Aggressive Leader • Top-Down Management Style • Feared by Employees • Known for Outsourcing • Blunt Talker Harry Stonecipher

44. Organizational Structure

45. Value Chain Analysis Firm Infrastructure Human Resource Management Support Activities Technological Development Procurement Service Marketing & Sales Inbound Logistics Outbound Logistics Operations Primary Activities